1. Field of the Invention
The present invention relates to the field of financial markets. More particularly, the invention relates to the electronic trading of options products.
2. Related Art
Volatility and uncertainty are ever present in today's financial markets, especially in the equity markets. In the face of this type of uncertainty, treasurers and fund managers are increasingly advised to consider methods of managing their exposure to sharp movements in the financial markets. Equity and index options can provide the flexibility and security required.
Treasurers, fund managers, and other market participants have a number of choices available to them to help them manage their equity exposure. These choices include exchange-traded products, such as futures and options contracts, or over-the-counter (OTC) products, such as swaps, Forward Rate Agreements (FRAs), caps, and floors together with the underlying cash market products themselves. Successful players in today's volatile markets will typically employ the full range of available risk management and trading strategies.
Exchange traded futures and options contracts offer market participants not only a high degree of versatility in their use, but also significant advantages as strategic instruments, especially when complemented by OTC derivative and cash market financial instruments. Indeed, when used effectively, exchange-traded futures and options contracts, in conjunction with cash market and OTC derivative instruments, can enhance returns, reduce risks and manage equity risks with greater certainty, precision and economy.
Retail investors typically prefer to deal directly on an exchange, as opposed to OTC, because they know that exchanges are bound by certain rules and regulations, and because most retail investors do not have access to the OTC markets. With respect to derivatives, the most likely product group to attract retail investors is equity and index options. This is because, provided that the product groups are understood, the cost or “loss” from any transactions can be understood at the outset.
However in order to attract retail investors to the equity and index options markets, clear, transparent and reliable market data must be made available, via a variety of sources. Many electronic equity and index option markets suffer from the problem of “blank screens”, where many option series fail to be continually populated with representative “bids” and “offers”. The present invention includes features that are intended to address this shortcoming of conventional trading systems.
An option is an instrument that gives its holder the right, but not the obligation, to buy or sell something at fixed price. Options are available on a wide range of products, literally from pork bellies to platinum. For example, Euronext.LIFFE lists options on interest rate futures, government bonds, commodities, and individual equities. In addition, Euronext.LIFFE lists a number of index options products, including the FTSE 100 Index, the CAC 40 Index, the BEL 20 Index, the AEX Index and the FTSE Eurofirst 80 and 100 Indices.
Options offer investors the means to take advantage of individual share price movements and general stock market fluctuations. They may be used in a number of different ways, including the following:                as a form of insurance against a fall in the price of a share or in an index;        as a way of generating income from an existing shareholding; and        for straightforward limited risk speculation.        
Options may be risky investments, and the degree of risk largely depends on how they are used. The buying of options involves a limited risk, i.e., the maximum loss is limited to the price paid for the option and therefore is known at the outset. The selling, or “writing”, of options, although having a wide range of uses, is a potentially high-risk strategy, requiring a high degree of product knowledge. Investors are typically urged not to write “uncovered” options until they have a thorough understanding of the implications.
There are two types of equity options: calls and puts. The buyer of a call option acquires the right, but not the obligation, to buy shares at a fixed price. The buyer of a put option acquires the right, but not the obligation, to sell shares at a fixed price.
Option information is carried in many national newspapers, and by quote vendors. Detailed information is laid down in the contract specification. In the contract, information can be found about the currency in which the option is traded, the contract size (i.e., the number of shares the option refers to), and the option style (for example, option can be exercised during its lifetime (American style), or only at the end (European style)). Price information is typically set out as shown in FIG. 1.
Each option contract has an expiry date, after which that particular contract is no longer available for trading. When one option expires, another option that has a future expiry date is listed. The expiry dates available for trading are specified in the contract specifications. For most options, the expiry dates available are fixed at three-monthly intervals, and the most common cycles are:                January, April, July, October        February, May, August, November        March, June, September, DecemberFor those options at any time of the year, three expiry dates will be quoted for each option. For example, referring again to FIG. 1, in November there will be equity options available on Angus Toys, which is on the January expiry cycle, with expiry dates in January, April and July. When the January options expire, October options will be introduced, so that April, July and October options will then be available.        
The price at which an option holder has the right to buy or sell the underlying security is known as the exercise price, or strike price. Exercise prices are typically set by the exchange. American-style equity options may be exercised on any business day up to and including the last trading day. The term “exercise” refers to taking up the right to buy or sell the underlying shares. When an option holder exercises his/her option, a randomly selected writer is notified of this and is required to deliver or take delivery of the underlying shares.
To buy an option, the buyer pays a sum of money, called the premium. Premiums are quoted in the currency specified in the contract specifications. Equity options must be paid for, in full, on the day following that on which the transaction is entered into. This is known as paying “premium up front”. Again referring to FIG. 1, an example is provided in which, for simplicity, only one price is shown for each option. In practice, there will always be two prices quoted for each option, a bid and an offer price. For example, the January 240 call option price could be quoted as 23-27. This would mean that, given this option would trade in pence, it would cost an investor 27p to buy this option and that the investor would receive 23p for selling it. The premium for the January 240p call option (i.e., the right to buy the number of Angus Toys shares as specified in the contract specifications on or before the option's expiry day in January, at a cost of 240p per share) is 25p per share. Supposing that the contract size of Angus Toys options is 1000, then the cost of 1 contract would be £250 (i.e., 1,000 shares at 25p/share). This is the amount payable, in full, by the buyer to the seller (i.e., writer) on the day following the transaction.
The value of an equity option contract is influenced by several factors, including the underlying share price, the time to expiry, volatility, dividends, and interest rates. The underlying share price, together with the option's exercise price, determines the intrinsic value of an option. For example, if the share price exceeds the exercise price of a call option by 20p, the option is said to have 20p worth of intrinsic value and to be 20p “in-the-money”. In the case of a put option, the reverse is true. A put option is in-the-money when the exercise price exceeds the share price.
Time has a value, since the longer the option has to go until expiry, the more opportunity there is for the share price, and hence the option price, to move. Generally, the further away the expiry day, the higher an option's time value. This is true for both calls and puts. Referring again to Table 1 above, the premium for the January 240 call option on Angus Toys increases from 25p for the January expiry to 35p for the April expiry and to 42p for the July expiry. Therefore, if the payment of the premium gives an investor the right to purchase stock at 240p when the current price is 254p, the option must be worth at least 14p (i.e., the difference between the current share price and the exercise price). This 14p is known as the option's intrinsic value. The remaining 11 p of the total 25p premium is known as the time value. Assuming the same exercise price, this will be greater for options which have a longer time to run until expiry.Premium=Intrinsic Value+Time ValueThe premium for the January 260 call option is 14p. This is because the exercise price, at 260p, is higher than the current underlying price of 254p, so the call option has no intrinsic value. The premium in this case consists solely of time value.
Time value is also affected by how volatile the price of an underlying share has been in the past or is expected to be in the future. More volatile shares attract higher time value as profit opportunities for option holders, and hence risks for option writers, are greater than for shares with more stable prices.
Dividends are paid to shareholders, but not to holders of options. Since the share price tends to fall by the amount of the dividend after it has been announced, it follows that the price of an option will reflect the value of any expected dividend payments.
Interest rates also affect the price of equity options. However, changes in interest rates have a relatively small effect on option premiums.
Equity and index options may be traded by competitive face-to-face open outcry on a trading floor of a market. However, in recent years, some markets have been automated to enable electronic trading of equity and index options, and other financial products. Such markets may operate in a highly versatile, technological environment that offers members and end-users considerable flexibility in the way they choose to access the market. Private investors and institutional users still access the market by dealing through a broker.
In view of the current options market environment, the present inventors have recognized the importance of providing timely and reliable market data to participants in order to provide an incentive for greater trading activity. As described above, the present lack of timeliness of such market data is exemplified by the “blank screens” problem. Accordingly, the present invention is intended to address this problem.